Sharp's contingent liabilities, which delayed its reality-show marriage to Foxconn, were but a red herring.
To be sure, being told the night before the wedding that your bride has some skeletons in the closet probably warranted Foxconn getting cold feet. Now, more than six weeks after the two said ``I do'' in front of witnesses (read: stock exchanges), Sharp has posted an annual loss 59 percent wider than analysts expected, and publicly revealed it's worth less than nothing.
Gadfly has previously outlined how Foxconn Chairman Terry Gou's record for doing deals isn't stellar, and how he really should cut Sharp into pieces. Shareholders of Hon Hai Precision Industry and Foxconn Technology Co., the two Taipei-listed members of Gou's Foxconn Technology Group that are saddled with the shares, may want to pay attention, though.
While Gou may have sorted through those contingent liabilities and used them as leverage to extract a better deal, the reality is Sharp was selling him a pair of handcuffs.
The signing date for Foxconn's takeover of Sharp is crucially important. While the duo made the announcement at the end of March, the transaction didn't take effect until a few days later, in April. With Sharp's financial year ending March 31, any losses, as well as balance sheet items, belong PF, or pre-Foxconn.
That Sharp's losses were so wide, and that its balance sheet puts it effectively underwater, now become PF artifacts.
Certainly, there'll be plenty of investors and analysts explaining their bullish views on this new age of Sharp-Foxconn cooperation. After all, the argument goes, some debt will be forgiven and Foxconn's money will fill that hole and rectify the problem.
But the fact of the matter is that as of March 31, and just two days before Foxconn formally signed the contract to buy a controlling stake, Sharp had a negative book value. That means Foxconn, and its shareholders, paid $3.5 billion for something that's worth $286 million less than nothing, which puts into perspective the $890 million contingent-liability discount Gou fought so hard for.
Making it worse, under the deal that was prematurely announced by Sharp on Feb. 25, Hon Hai and Foxconn Technology Co. shareholders were to be shackled to Sharp. Shackled to the shares, the workers, the brand, and to every individual unit.
Among the provisions, Sharp required Foxconn maintain the Osaka-based company's operational independence, including the handling of its technologies, customers, workers and suppliers. No asset sales, no staff cuts.
Its unclear whether those February deal terms apply in the final April contract, but Foxconn has publicly and privately stated it intends to keep to the spirit of the agreement. Sharp expressed as much on Thursday when it said it has no plans to offer voluntary retirement, an important policy when you consider that forced retirement is next to impossible in Japan.
Given that the whole point of its purchase was to leverage Sharp's assets and turn around operations -- for which staff cuts are necessary -- Foxconn being stuck with worthless assets and a bloated workforce makes that red herring even tougher to digest.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Except solar wherein Sharp decrees: Sharp will use its best efforts to improve the profitability of Sharp’s Energy Solution business, including but not limited to seeking strategic partnerships or joint ventures...and the Planned Allottees shall respect such efforts and cooperate thereto.
That's page 5 of the English translation.
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